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((socialism sidebar|models))
((short description|Neoclassical economic model))
The '''Lange model''' (or '''Lange–Lerner theorem''') is a [[Neoclassical economics|neoclassical]] [[economic model]] for a hypothetical [[socialist economy]] based on public ownership of the [[means of production]] and a trial-and-error approach to determining output targets and achieving [[economic equilibrium]] and [[Pareto efficiency]]. In this model, the state owns non-labor factors of production, and markets allocate final goods and consumer goods. The Lange model states that if all production is performed by a public body such as the state, and there is a functioning price mechanism, this economy will be Pareto-efficient, like a hypothetical [[market economy]] under [[perfect competition]]. Unlike models of capitalism, the Lange model is based on direct allocation, by directing enterprise managers to set price equal to [[marginal cost]] in order to achieve Pareto efficiency. By contrast, in a capitalist economy, private owners seek to maximize profits, while competitive pressures are relied on to indirectly lower the price, this discourages production with high marginal cost and encourages [[economies of scale]].

This model was first proposed by [[Oskar R. Lange]] in 1936 during the [[socialist calculation debate]], and was expanded by economists like H. D. Dickinson and [[Abba P. Lerner]]. Although Lange and Lerner called it "[[market socialism]]", the Lange model is a form of [[centrally planned economy]] where a central planning board allocates investment and capital goods, while markets allocate labor and consumer goods. The planning board simulates a market in capital goods by a trial-and-error process first elaborated by [[Vilfredo Pareto]] and [[Léon Walras]].<ref>((Cite journal | doi = 10.1080/03085149800000027| title = Socialism against markets? A critique of two recent proposals| journal = Economy and Society| volume = 27| issue = 4| pages = 407–433| year = 1998| last1 = Hodgson | first1 = G. M.))</ref>  The Lange Model is in practice a type of [[centrally planned economy]] and not a type of [[market socialism]].

The Lange model has never been implemented anywhere, not even in Oskar Lange's home country, [[Poland]], where [[Soviet-type economic planning]] was imposed after World War II, precluding experimentation with Lange-style economy.<ref name="Post-Lange Socialism: An Evaluation of Profit-Oriented Proposals, 1995">((Cite journal | last1 = Yunker | first1 = James A. | year = 1995 | title = Post-Lange Market Socialism: An Evaluation of Profit-Oriented Proposals | journal = Journal of Economic Issues | volume = 29 | issue = 3 | pages = 683–717 | jstor = 4226984 | doi=10.1080/00213624.1995.11505705))</ref> Some parallels might be drawn with the [[New Economic Mechanism]] or so-called [[Goulash Communism]] in [[People's Republic of Hungary|Hungary]] under [[János Kádár|Kádár]], although this was not a pure Lange-model system.<ref>Wolf, Thomas. "The Lessons of Limited Market-Oriented Reform" (1991), The Journal of Economic Perspectives, Vol. 5, No. 4 (Autumn, 1991), pp. 45-58</ref>

== Overview ==
The model is sometimes called the "Lange–Lerner" model.<ref>((cite journal |last=Bator|first=Francis M.|title=The Anatomy of Market Failure|journal=The Quarterly Journal of Economics|date=August 1958|volume=72|issue=3|pages=351–379|jstor=1882231|doi=10.2307/1882231))</ref> [[Abba Lerner]] wrote a series of articles that greatly influenced Lange's thinking. For example, Lerner (1938) caused Lange to re-write his 1936 and 1937 articles on [[market socialism]], before they were re-published as chapters in a 1938 book. Lerner (1938) influenced Lange's thinking on [[social dividend]] payments. Lerner (1944) also argued that investment in the Lange model would inevitably be politicized.

The Lange model was developed in response to [[Ludwig von Mises]] and [[Friedrich Hayek]]'s [[criticisms of socialism]] during the [[socialist calculation debate]]. The critics argued that any body that owns and consolidates a society's means of production cannot acquire the information needed to calculate general equilibrium prices, and that market-determined prices were essential for the rational allocation of producer goods. The Lange model contains principles proposed by neoclassical economists [[Vilfredo Pareto]] and [[Léon Walras]]. Lange's theory emphasizes the idea of Pareto efficiency: a situation is Pareto-efficient if there is no way to rearrange things to make any individual better off without making anyone worse off. To achieve Pareto efficiency, a set of conditions must be formulated in stages. This idea of deriving conditions to ensure that consumer preferences are in balance with the maximum amount of goods and services produced is emphasized by Walras. The theorem indicates that a socialist economy based on public ownership could achieve one of the principal economic benefits of capitalism - a rational price system - and was an important theoretical force behind the development of the concept of [[market socialism]].

== Basic principles ==
((refimprove section|date=March 2013))
[[File:Lange_model_diagram.svg|alt=|thumb|367x367px|A chart to show how the model would hypothetically function.]]
((Economics sidebar))
The Lange model suggests three levels of decision-making. The lowest level contains firms and households, the intermediate level contains industrial ministries, and the highest level is the central planning board. The board sets the initial price of consumer goods arbitrarily and informs the producing firms of these prices. The state-owned firms then produce at the level of output where [[marginal cost]] equals price, P = MC, so as to minimize the cost of production. At the intermediate level, industrial ministries determine the sectoral expansion of industry. Households decide how to allocate income and how much labor to supply by choosing between work and leisure.

=== Institutions ===
The key institutions of the Lange model include the central planning board (CPB), industrial ministries for each economic sector, and state enterprises [[Workplace democracy|managed democratically]] by their employees.

=== Trial-and-error price adjustments ===
Because prices are set by the central planning board "artificially" aiming to achieve planned growth objectives, it is unlikely that supply and demand will be in equilibrium at first. To produce the correct amount of goods and services, the Lange model suggests a trial-and-error method. If there is a surplus of a particular good, the central planning board lowers the price of that good. Conversely, if there is a shortage of a good, the board raises the price. This process of price adjustments takes place until equilibrium between supply and demand is achieved.

=== Central planning board ===
The central planning board (CPB) has three major functions in the Lange model: First it instructs firms to set price to equal marginal cost, secondly it adjusts prices to attain market-clearing prices for goods and services, and finally, it reinvests the economic profit derived from state enterprises into the economy based on a target rate of growth. The central planning board also distributes social dividends to the population.

=== Social dividend ===
Apart from setting prices, the central planning board allocates [[social dividend]]s. Because all non-labor factors of production are publicly owned, the rents and profits of these resources belong to the public. The profits would be used to finance a social dividend scheme based on the individuals' share in the income derived from the socially owned capital and natural resources, providing a complementary source of income for workers alongside their salaries and wages.<ref name="On the Economic Theory of Socialism, 1936">''On the Economic Theory of Socialism'', by Lange, Oskar. 1936. The Review of Economic Studies, Vol. 4, No. 1: "It seems, therefore, convenient to regard the income of consumers as being composed of two parts: one part being the receipts for the labour services performed and the other part being a social dividend constituting the individual's share in the income derived from the capital and the natural resources owned by society."</ref>

== Advantages ==
((Refimprove section|date=August 2015))
The Lange economic model has a number of theoretical advantages. One advantage is public control over investment. The rate of economic growth would be largely state-determined and a major determinant would be investment ratio.

Another advantage argued by Lange was that [[externalities]] could be better accounted for, thanks to the state's ability to manipulate resource prices. Because the state controls all firms, they could easily factor the cost of an externality into the price of a certain resource. Because decisions are made at higher rather than lower levels, it is argued that these decisions are less likely to have undesirable environmental consequences.

Furthermore, because the state uses [[marginal cost pricing]] and determines entry, Langean socialism can avoid monopolies and the accompanying lack of [[allocative efficiency]] and [[x-inefficiency|x-efficiency]].

The model claims to solve another main criticism of [[capitalism]]. Lange believed that his model would reduce cyclical instability because the state would control savings and investment, consequently eliminating a major source of inefficiency, inequality and social instability that arises from violent cyclical shifts under capitalism.

== Criticisms ==
[[Milton Friedman]] criticized the Lange model on methodological grounds. According to Friedman, the model rested on "models of imaginary worlds" rather than "generalizations about the real world", making the claims of the model immune to falsification. He also criticized the model on ethical grounds, pointing out that governments would be quick to shut down or seize firms that do not align with targets mathematically proposed by the system, thus limiting true economic freedom.<ref>Milton Friedman, 'Lange on Price Flexibility and Employment', ''Essays in Positive Economics''.</ref> Other criticisms include how the Lange model assumes that market data is static and can be 'given' to central planners and that humans are passive and neutral in their preferences.<ref>((Cite journal |last=Duddy |first=Craig |date=2021 |title=A Critique of the Lange Model |url=https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3870418 |journal=SSRN |via=SSRN))</ref>

== See also ==
* [[Economic planning]]
* [[Market socialism]]
* [[Marginalism]]
* [[Socialist economics]]
* [[Fred M. Taylor]]
* [[Indicative planning]]

== References ==
((reflist))

== Literature ==
* ((cite book |last= Gregory |first= Paul R. |author-link= Paul R. Gregory |author2=Robert C. Stuart |title= Comparing Economic Systems in the Twenty-First Century |year= 2004 |publisher= Houghton Mifflin Company |location= Boston, MA |isbn= 0-618-26181-8 ))
* Kowalik, Tadeusz (1987). "Lange-Lerner mechanism," ''[[The New Palgrave: A Dictionary of Economics]]'', v. 3, pp.&nbsp;129–30.
* [[Roemer, John]] (1994). ''[[A Future for Socialism]]'', Verso Press.
* ((cite book |last= Stiglitz |first= Joseph E. |author-link= Joseph E. Stiglitz |title= Whither Socialism? |year= 1994 |publisher= MIT Press |location= Cambridge, MA |id=0-262-19340-X ))
* ((cite journal |last= Lo |first= Dic |author-link= Dic Lo |author2=Russell Smyth |year= 2004 |title= Towards a Re-interpretation of the Economics of Feasible Socialism |journal= Cambridge Political Economy Society |volume= 28 |issue= 6 ))
* ((cite journal | last1 = Lange | first1 = O | year = 1935 | title = Marxian Economics and Modern Theory | journal = Review of Economic Studies | volume = 2 | issue = 3| pages = 189–201 | doi=10.2307/2967586| jstor = 2967586 ))
* ((cite journal | last1 = Lange | first1 = O | year = 1936 | title = On the Economic Theory of Socialism I | journal = The Review of Economic Studies | volume = 4 | issue = 1| pages = 53–71 | doi=10.2307/2967660| jstor = 2967660 ))
* Lange, O 1937 On the Economic Theory of Socialism II ''The Review of Economic Studies'' V4 N 123-142
* Lange, O 1938 On the Economic Theory of Socialism B Lippincott ed. University of Minnesota Press
* Lange, O 1940 Letter to FA Hayek, translated by Thadeusz Kowalik
* Lange, O 1942 Economics of ''Socialism Journal of Political Economy'' 50(2):299-303
* Lange, O 1957a Political Economy of Socialism, reprinted in ''Kowalik'' 1994
* Lange, O 1957b. Role of Planning in a socialist economy, reprinted in ''Kowalik'' 1994
* Lange, O 1967 The Computer and the Market in Socialism, Capitalism, and Economic Growth Feinstein Ed. Reprinted in ''Economic Theory and Market Socialism'' T Kowalik ed. Edward Elgar pub.
* ((cite journal | last1 = Lerner | first1 = A | year = 1934 | title = Economic Theory and Socialist Economy | journal = The Review of Economic Studies | volume = 2 | issue = 1| pages = 51–61 | doi=10.2307/2967550| jstor = 2967550 ))
* ((cite journal | last1 = Lerner | first1 = A | year = 1936 | title = A note on Socialist Economics | journal = The Review of Economic Studies | volume = 4 | issue = 1| pages = 72–76 | doi=10.2307/2967661| jstor = 2967661 ))
* ((cite journal | last1 = Lerner | first1 = A | year = 1937 | title = Statics and Dynamics in Socialist Economics | journal = The Economic Journal | volume = 47 | issue = 186| pages = 253–270 | doi=10.2307/2225526| jstor = 2225526 ))
* ((cite journal | last1 = Lerner | first1 = A | year = 1938 | title = Theory and Practice in Socialist Economics | journal = The Review of Economic Studies | volume = 6 | issue = 1| pages = 71–5 | doi=10.2307/2967541| jstor = 2967541 ))
* Lerner, A 1944 The Economics of Control
* ((cite journal | last1 = Lerner | first1 = A | year = 1972 | title = The Economics and Politics of Consumer Sovereignty | journal = The American Economic Review | volume = 62 | issue = 1–2| pages = 258–266 ))
* ((cite journal | last1 = Lerner | first1 = A | year = 1977 | title = Marginal Cost Pricing in the 1930s | journal = The American Economic Review | volume = 67 | issue = 1| pages = 235–243 ))
* MacKenzie, DW, 2006 Oscar Lange and the Impossibility of Economic Calculation, Studia Economicze
* MacKenzie, DW Social Dividends, Entrepreneurial Discretion, and Bureaucratic Rules
* MacKenzie, DW Capital and Income in Democratic Socialism
* MacKenzie, DW Trial and Error in the Socialist Calculation Debate
* ((cite journal|title = Oskar Lange's Theory of Socialist Planning|last = Roberts|first = Paul Craig|author-link = Paul Craig Roberts|journal = [[Journal of Political Economy]]|issn = 1537-534X|volume = 79|issue = 3|year = 1971|pages = 562–77|doi = 10.1086/259768|jstor = 1830772| s2cid=153391920 ))
* ((cite journal|title = Some Observations on the Concept of 'Socialism' in Contemporary Economic Theory|last = Rosefielde|first = Steven|journal = [[Soviet Studies]]|issn = 0038-5859|volume = 25|issue = 2|year = 1973|pages = 229–43|doi = 10.1080/09668137308410916|jstor = 150886))
* ((cite journal |last= Shleifer |first= Andrei |author-link= Andrei Shleifer |author2=Robert W. Vishny |year= 1994 |title= The Politics of Market Socialism |journal= [[The Journal of Economic Perspectives]] |volume= 8 |issue= 2 |pages=165–76 | doi = 10.1257/jep.8.2.165 |s2cid= 152437398 |url= http://nrs.harvard.edu/urn-3:HUL.InstRepos:33077903 |doi-access= free ))

== Further reading ==
*[https://www.questia.com/library/1G1-17614249/post-lange-market-socialism-an-evaluation-of-profit-oriented Post-Lange Market Socialism: An Evaluation of Profit-Oriented Proposals] by James A. Yunker
*Revisiting the Socialist Calculation Debate: The role of markets and finance in Hayek's response to Lange's challenge, by Paul Auerbach and Dimitris Sotiropoulos
*Oskar Lange and the Impossibility of Economic Calculation by D.W. MacKenzie
*[https://www.mises.org/journals/scholar/mackenzie7.pdf Capital and Income in Democratic Socialism] by D.W. MacKenzie
*[https://www.mises.org/journals/scholar/macKenzie11.pdf Trial and Error in the Socialist Calculation Debate] by D.W. MacKenzie

[[Category:Economic planning]]
[[Category:Economic systems]]
[[Category:Economics models]]
[[Category:Market socialism]]
[[Category:Neoclassical economics]]
[[Category:Socialism]]

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